A Georgist Take on Kelsonian Binary Economics

Edward J. Dodson

[An unpublished essay, April, 2005]

How one assesses the role of a society's monetary system depends, in part, on one's understanding of history, on one's understanding of moral principles and on one's appreciation for the scientific principles underlying the operation of political economies. Despite centuries of thoughtful analysis on the subject by countless writers, the debate -- and the arguments inherent therein -- continue to this day. While some of us continue to make the case for reforms of one type or another, the political machinery of the past has resulted in the adoption of a global monetary system prone to instability and periodic upheaval.

This paper takes a look at the reforms advanced by the proponents of universal capitalism -- Louis O. Kelso, Patricia Hetter Kelso and Mortimer J. Adler, as presented in the paper "A New Look at Prices and Money"[1] by Norman G. Kurland of the Center for Economic and Social Justice. My analysis is colored by my own past research and writing on the subject and by a strong intellectual commitment to the principles of political economy as developed by Henry George. George held with many of his predecessors in the treatment of natural opportunities (described by the term "land") as a distinct and primary "factor or production." Under this construct, "land" is (and ought to be so treated under law) as the source of individual wealth but not as wealth itself. Kelsonians make no such distinction between natural opportunities and the goods produced by the active factors of production -- labor and capital goods. In this sense, the Kelsonian analysis is consistent with that of Neo-classical economists. Of this school of economists (i.e., the Neo-classical), University of California economics professor Mason Gaffney (a strong proponent of Henry George's analysis) wrote:

"[Neo-classical economics] took form about a hundred years ago, when Henry George and his reform proposals were a clear and present political danger and challenge to the landed and intellectual establishments of the world. Few people realize to what degree the founders of Neo-classical economics changed the discipline for the express purpose of deflecting George and frustrating future students seeking to follow his arguments."[2]

Kelsonians acknowledge the origin of entrenched wealth in the United States is to be found in the system of land tenure and the early monopolization of land. Louis and Patricia Kelso make this point very succinctly:

"By the time the Industrial Revolution reached American shores, about 1815, the few original capitalists - those who had gained their wealth by grants, charters, and land purchases from the English and European crowns -- were economically entrenched, having used their landed collateral and acquisitive expertise to supersede the nascent loyalist plutocracy of explorers, merchants, and traders."[3]

Yet, they somehow also repeat the myth that because land "was the chief form of property … its wide distribution among the whites … brought about in fact a considerable economic equality to correspond to the theory of political equality."[4] Historian Jackson Turner Main's research concluded that inherited wealth was already the basis for most of the great family fortunes as early as the mid-eighteenth century. As soon as anyone had sufficient assets accrued from some productive enterprise, their next step in building a personal fortune was to engage in land speculation. Tocqueville observed cracks in the Democracy well before the closing of the frontier and, as Kelso and Kelso conclude, whatever degree of equality of opportunity existed ended with "the close of the nineteenth century, when the American Industrial Revolution began in earnest."[5] Henry George experienced first hand in his adopted city of San Francisco the rapid concentration of wealth and rise of poverty that occurred well before the closing of the frontier, the direct result of land monopoly. The current Kelsonian leadership should take a few minutes to re-read the short introduction on U.S. economic history by Kelso and Kelso I have quoted from. If only the authors had not fallen into the trap of treating land as just another form of capital. Land produces nothing. Land is the source of what is produced.

Thus, the primary criticism I have of the Kelsonian system is its failure to recognize that land must be treated as a distinct factor of production, with distinct characteristics and distinct required treatment under law as a form of property. This blind spot leads Kelsonians down a path of analysis that, at best, results in the mitigation of effects associated with what Robert Heilbroner described as "the economic problem" -- rather than permanent solutions. And yet, in their first book together, Louis Kelso and Mortimer Adler align themselves with the political economists, writing:

"The factors of production fall into three main categories: (1) natural resources, (2) human labor, and (3) inanimate instruments made by man."[6]

Unfortunately, they go on to confuse the distinction by suggesting that agricultural lands are inherently productive, while mineral-laden lands are not. In each case, labor is required to yield any wealth. Even when people take fruits or vegetables from land that was not tilled or planted, labor is the active agent that brings wealth to the individual. Without labor these products of nature would never reach markets, never be consumed and never become part of the economy. It is access to land that enables labor to produce wealth directly. Justice requires that the laws of a society ensure equality of access. Kelso and Adler refer to "Locke's labor theory of property" as the moral basis for our "appropriation of the things which God gave to all men in common."[7] Unfortunatley, they ignored Locke's proviso that such appropriation was to be limited to that which was productively used and to the extent that sufficient land of equal quality was available to all. The political economists picked up from this point to examine how "rent" arose once Locke's proviso disappeared in response to increased population and law that permitted claims of ownership to huge tracts of land.

With the concentrated control over land (i.e., over locations in cities and towns, over natural resource-laden lands, over the broadcast spectrum, over the ocean fisheries and seabed, to name the most common forms thereof) in place and deeply entrenched, Kelsonians look to the socio-political arrangements creating control over the monetary system as the primary means of stimulating economic growth and a just distribution of wealth. Norman Kurland begins his paper by quoting Louis and Patricia Kelso on what money is:

"Money is not a part of the visible sector of the economy; people do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. …"

Kelsonians argue that "money is a 'social good', an artifact of civilization invented to facilitate economic transactions for the common good" but too often "used by a few who control it to suppress the natural creativity of millions of people." The even darker truth is that the history of monetary systems is a history of almost continuous debasement or outright counterfeiting of the circulating medium -- often by those who hold political power and control the police powers of the state. For most of history, some form of money has been necessary as a medium of exchange. The combination of private and public corruption has prevented establishment of socio-political arrangements and institutions that effectively protect the purchasing power of whatever serves as the monetary unit. As Norman Kurland observes, "history is replete with cases where money has been politically controlled to benefit the few at the expense of the many." Those who have had the power have consistently made use of it to transfer purchasing power to themselves without delivering goods or services of equal value in return.

The Kelsonian solution to the economic problem is to introduce "an asset-backed money supply that would provide sufficient liquidity to banks and other financial institutions for financing an expanding portion of new productive assets which are added each year to grow the economy." This new monetary system would, it is argued, foster both increased production of wealth[8] and a more equitable distribution thereof. Improved distribution comes as a result of "widespread individual ownership of productive capital, i.e., all nonhuman means of production." No doubt, to the extent workers share in the profits of business ownership, this adds to their well-being. The variable left out of this equation is that to a greater or lesser degree, the profits of most businesses include imputed or actual rents. Land ownership without full compensation of location rent to society yields imputed income to the land owner's monopolistic privilege (i.e., the monopolistic control over whatever location or locations are owned). Businesses that lease land from other private individuals or entities are relinquishing a portion of their legitimate income obtained by producing goods or services. Rent is a legitimate societal claim on production (ideally distributed to all citizens equally, or utilized to provide for public goods and services, democratically agreed upon). The failure of society to collect and utilize rent in this manner is to sanction private privilege.

Norman Kurland reminds us that "no known economy in the history of civilization, particularly since the advent of modern technology, has offered both genuine justice for all, and optimum rates of productive efficiency." History reveals, in fact, a consistent pattern of hierachical development following the establishment of permanent settlements. Communitarian societal structures give way to privilege-based rule divided between a landed aristocracy (militaristically supported) and the priestcraft. Kurland and other Kelsonians will agree that a direct outcome of these developments is a societal structure that prevents many (the majority in some societies) from any opportunity to develop their inherent abilities and achieve their potential. The monopolization of what Marx focused his criticism on -- the means of production -- is still a serious problem; however, the monopoly over capital goods was and is a step-child of land monopoly. As Winston Churchill declared early in his political career: "It is quite true that land monopoly is not the only monopoly which exists, but it is by far the greatest of monopolies -- it is a perpetual monopoly, and it is the mother of all other forms of monopoly."

To lift the propertyless up from generational poverty, land monopoly must be eliminated. At best, the Kelsonian proposals offer mitigation by achieving a broader distribution of "rent" to shareholders of companies who profit by privately appropriating "rents," a claim on production that rightfully belongs to all members of a society. When Norman Kurland asks whether in the future the productive assets will continue to be "owned by the same top 10% of U.S. families who own and control 90% of directly owned U.S. corporate stock," the answer must be "yes," unless whatever reforms are introduced remove the financial rewards for land hoarding and land speculation, achieving a dismantling of land monopoly. For reasons easy to understand, data on land ownership in the United States is not captured and reported. What is clear is that the ownership of "land value" is even more highly concentrated at the top than that of income or other assets. The land owned by most Americans is limited to that beneath their primary residence. A huge portion of the most valuable land in cities -- and "land" in the other forms noted above -- is owned by corporations, either privately held or the shares of which are owned in large measure by the world's wealthy elite. And, as Norman Kurland notes, "the corporate umbrella insulates the eventual owners …, generally the already wealthy, from personal risk in the event the corporation defaults on its loans or goes bankrupt." Land ownership yields unearned speculative gains, allowing owners to invest in business enterprises, allowing some portion of the profits to be invested in the acquisition of more land, and a repetition of a pattern of investment activity resulting in huge personal fortunes for the few and restricted opportunity for many others.

"Binary economics would require that inclusionary self-liquidating capital credit be made accessible to corporate employees and other current non-owners of productive capital in order to turn them into economically independent capital owners," writes Norman Kurland. This is the Kelsonian approach to incremental mitigation. The question is whether this will, in fact, "break the monopoly of capital ownership held by the currently wealthy -- those with functionally excessive productive power in terms of their consumer needs and wants." My understanding of political economy, incorporating the analysis put forth by Henry George, leads me to answer that while the widespread introduction of an "inclusionary self-liquidating capital credit" is constructive, the tool does not address the core of privilege that exists here in the United States (and, even more deeply, elsewhere around the globe).

The key to understanding my pessimism is in the working of land markets absent the public collection of location rent, the effects exacerbated by the burdensome taxation of property improvements and income flows generated by goods production, services and commerce. Today, the effective rate of taxation on location rent is almost universally low -- no more than 10-15 percent as most. The net imputed or actual rent is capitalized into a selling price. Moreover, because the cost of holding land undeveloped is so low, rising prices do not clear the market for land as price does for the markets for labor, capital goods or credit. As prices paid for land are rising, owners will hold land off the market in anticipation of even greater gains. Buyers must, therefore, offer prices significantly above that warranted by capitalization of current rental value to entice an owner to relinquish a location for current development. On a supply-demand graph, this is represented by the appearance of a supply curve that leans to the left as price increases. Adding to the power of land ownership is the fact that in any regional market a significant portion of the land area is set aside for public purposes, for open space preservation, for parkland, for highways, or is undevelopable because of topography, subsurface instability or other factors.

The housing sector is a good example of how the land market exerts itself on behalf of land owners. Any measure that increases the number of households competing for housing will ultimately result in an increase in land costs sufficient to close the "window of affordability" created. When economists say that "housing prices are sticky downward" what they really mean is that residential land prices do not come down just because there is a drop in current demand. The reason is simple: only newly-constructed housing units are business inventory. Existing housing is someone's shelter, and existing housing represents most of the supply put on the market at any given time. Affordability is a function of the relationship between housing price, household income, savings required to make a down payment and cover closing costs, and the rate of interest charged by the mortgage lender. Any change in the above market variables that bring more potential buyers into the market will allow land owners to increase their asking price for developable land, and these increases will pass through to include the land beneath existing housing units as well. Housing constructed in the 1950s incurred land costs of 10-15 percent of the total selling price. Today, the land cost component is often 50 percent or more; or, in order to keep the ratio lower, the type of house constructed is affordable only to those with incomes well-above the national median. In high demand areas even multi-unit condominium buildings and other high-density developments may still be priced above what a majority of households can afford to pay based on their capacity to carry mortgage debt.

By the methods proposed by Kelsonians (the Capital Homestead Account, ESOP, CSOP), Norman Kurland indicates "a citizen could accumulate from birth to retirement a tax-sheltered estate of $200,000. Furthermore, over that period, he would receive dividend income totaling over $750,000, and at retirement an estimated annual CHA dividend income of $30,000." I suggest that the model that produced this expected results needs to be revised to factor in land ownership data and the distribution of rent as distinct variables. Perhaps a marriage is possible to maximize the advantage of both the Georgist and Kelsonian strategies. To the Kelsonians I recommend the recently-published book by economic consultant Fred Harrison - Boom Bust: House Prices, Banking and The Depression of 2010 (Shepheard-Walwyn). A reading of this book might provide a platform for dialogue and collaborative effort.

NOTES AND REFERENCES

[1] The full title of this paper is: "A New Look at Prices and Money: The Kelsonian Binary Model for Achieving Rapid Growth Without Inflation.

[2] Mason Gaffney and Fred Harrison. The Corruption of Economics (London: Shepheard-Walwyn, 1994), p.29.

[3] Louis O. Kelso and Patricia H. Kelso. Democracy and Economic Power (Cambridge, MA: Ballinger Publishing Co., 1986), pp.15.

[4] Ibid., p.13-14.

[5] Ibid., p. 12

[6] Louis O. Kelso and Mortimer J. Adler. The Capitalist Manifesto (New York: Random House, 1958), p. 33.

[7] Ibid., p.44.

[8] The term "wealth" is defined very specifically by Henry George for the purpose of ensuring clarity of analysis. Thus, in determining the quantity of wealth that exists or its produced in some period of time, George includes only those material goods produced by labor, with or without the use of capital goods that have exchange value. This definition specifically excludes land, which George defines as the entire physical universe except for people and the goods we produce.